What is an FSA?

A Flexible Spending Account (FSA) is a tool for employees to cover medical related expenses using pre-tax dollars. It can be used for medical, dental, and vision expenses and qualified over-the-counter items such as sunscreen. A Dependent Care FSA is similar but can be used most often for services like daycare, preschool and summer camp.

How do FSAs operate?

An employee typically fixes their FSA contribution in December ahead of the new calendar year. That full amount is accessible for the employee to use on January 1st.

The employee’s deductions are prorated and taken out of the employee paycheck throughout the calendar year based on the number of pay periods. The most common pay cycles are semi-monthly, 24 pay checks, and bi-weekly, 26 paychecks. So, each pay period, 1/24 or 1/26 of their FSA contributions deducted from their paycheck.

What happens when I leave my current payroll, PEO, or position mid-year?

Anyone enrolled in an FSA must spend their funds by the final day of the month with their current payroll or PEO. If not, they’ll risk forfeiting the entirety of their FSA contribution.

Pro Tip: Check out Amazon’s FSA store to shop for FSA qualified items.

The Good News:

An employee can spend the entirety of their FSA funds today, even if they’re not fully vested.

This means if a company makes a mid-year change to a new payroll or PEO system, employees can positively benefit by spending all their FSA funds even though they’ve only paid a portion.

Let’s break it down:

In a real world use case, an employee contributes $1,000 into an FSA. They have access to the entire $1,000 of funds on January 1st. They’re paid semi-monthly, 24 pay periods, so $41.66 is deducted from each paycheck. The employees company announces in April that effective on June 1st they’ll be changing to a new payroll and benefits system. The employee hasn’t spent any of their FSA. That means by June 1^st they’ll have paid $500 into their FSA. To “break even” the employee must spend the $500. However, they have access to the full $1,000 that they’re free and clear to spend.

The one caveat is that they must spend it while on the current payroll or benefits platform. This is typically the final day of the month before switching. However, this won’t be a surprise to employees since PEO or payroll transitions are typically 30–60 days out, like in the above example, so they’ll have adequate time to spend down their balance.

Changing payroll or PEO’s mid-year allows employees to positively benefit and legally use unvested FSA dollars without recourse or penalty.

This is the reason FSA vendors charge a monthly fee – to account for employees who use their unvested FSA balance when changing jobs or payroll providers during the year.

Conclusion:

Changing payroll providers during the year is common and doesn’t have to disrupt employees and their finances. FSAs are a powerful addition to any benefit package, but it’s important to understand how they operate. By partnering with an experienced benefits broker like ProHealth PEO Advisors, they’ll clearly communicate all impactful changes to your employees to ensure they don’t lose out on their hard-earned money.